Distributorship agreements after Brexit – part two
If a week is a long time in politics, given all that has been happening since the last suppliers supply and distributors distribute blog, a month is borderline an eternity.
There is now a UK EU Withdrawal Agreement agreed. But the agreement has not yet been approved by the UK Parliament let alone the EU Parliament and the EU Council. As such, we still do not know whether at 11.00pm UK time on 29 March 2019, the UK will start a transitional period running until 31 December 2020 at the earliest during which period existing EU laws will remain in force.
If the Agreement is approved, this will mean that for suppliers and distributors alike, until 31 December 2020, in effect, nothing substantially changes. Whilst planning for the day when the UK is no longer a member of the EU will still be required, few suppliers or distributors will face existential issues – at least for the time being.
But what if the UK EU Withdrawal Agreement is not approved? If a vote in the UK Parliament (currently indefinitely postponed from 11 December) goes against the Agreement, no-one knows at the present time what happens next other than the possibility increases that the UK will leave the EU on 29 March 2019 without a trade agreement in place.
If, therefore, the UK EU Withdrawal Agreement is not approved, what are the steps which can be taken to mitigate the risks mentioned here?
If it is good enough:
- for Joules which has been reported as taking warehouse space in mainland Europe and bringing forward supply of next Summer’s stocks; as well as
- Premier Foods and Fortnum & Mason (both of which have been reported in the news media as building up stocks of ingredients and champagne respectively),
is this something which it is open to a distributor to do? But being open contractually is fundamentally different to addressing issues such as:
- Is the relevant supplier able to supply the extra stock?
- Can the distributor afford the extra stock?
- Where is the extra stock to be stored?
- Can the distributor’s warehousing facilities accommodate such extra stock?
Of course, stocks (and for that matter, spare parts) do not simply fall from the sky. There are likely to be increased logistic costs as well as export/import requirements to be addressed. It is also possible that tariffs will be applied to goods moving from the UK to the EU and vice versa.
Many supply chains operate on a just in time basis with the distributor playing an important role and holding stock to ensure that particular supply chains continue to function whenever otherwise they might fail. However, without a trade agreement in place between the UK and the EU, it is likely that strict delivery timescales will be prejudiced by late deliveries. As a result, consideration should be given as to the contractual time periods to which each of supplier and distributor are bound.
Increased costs lead inevitably to a consideration of whether or not contract prices can be increased. The contract to which supplier and distributor are parties should be considered to determine whether, for example, there is a price review clause. At the same time, it is likely that the lack of a trade agreement will result in considerable currency fluctuation. Is this also addressed in the distributorship agreement between the parties? If not, the distributor may wish to consider at an early stage the possibility of hedging the risk.
There is no easy answer as to what will happen and its consequences. However, planning now can position both supplier and distributor to be in a better position if an agreement regulating trade fails to materialise after 29 March 2019 at 11.00pm.